Weighing the Pros and Cons of a 15-Year Mortgage vs a 30-Year Mortgage

Saving up for a down payment. Finding the right house. Negotiating a sale. Then, financing it all. So many steps go into purchasing an Inland Empire home. When it comes to deciding on financial terms, one of the things your lender will discuss with you is whether you want to go with a 15-year mortgage or a 30-year one. Each option comes with both pros and cons. Learn as much about both options before you make a final decision.

Weighing the Pros and Cons of a 15-Year Mortgage vs a 30-Year Mortgage

15-Year Mortgage

Pros – As the name says, a 15-year mortgage gets paid off in half the time as a 30-year mortgage. This means less interest paid throughout the life of the loan. And by “less”, I mean over $100,000 less. For example, let’s say you pay $400,000 for an Inland Empire home. You put 10% down. You save as much as $180,339 in interest if you go with the 15-year loan. If you pay it off in less than 15 years, you save even more money in interest. Since the shorter term is considered less risky by lenders, they offer lower interest rates for a 15-year mortgage, too. When you put less than 20% down on a shorter-term loan, the FHA charges less for PMI.

Cons – With a shorter term, you pay more per month…hundreds more. For example, using the $400,000 Inland Empire home discussed above, your monthly payment goes up by $761. That may put this loan out of reach for many home buyers. However, if you really want to pay that mortgage off in 15 years, it may mean lowering the amount you pay for the home (like from $400,000 to $300,000 or less). This severely limits your options, especially in today’s market. Finally, a higher monthly mortgage payment limits your available cash for things like investing, maintenance, and entertainment.

30-Year Mortgage

Pros – A lower monthly payment provides the biggest draw for a 30-year mortgage. This also allows more flexibility in how you pay your loan. Your lender gives you a set number that you absolutely must pay for your mortgage each month. But, if you find yourself able to pay more at any time during the life of the loan, you can make extra payments that go directly to your principal. Chipping away at your principal even with just an extra $100 a month can pay off a 30-year mortgage in 24 years. Plus, it saves you tens of thousands of dollars in interest at the same time.

Uncle Sam allows you to deduct your mortgage interest from your taxes. Since the majority of your mortgage payment consists primarily of interest in the first few years of your loan, that can be a huge number come tax time. Plus, the lower payment frees up more money for other things.

Cons – On the flip side, lenders charge a higher interest rate for a longer-term loan. Since the term is longer, you also pay much more in interest over the life of the loan. Likewise, a longer term means that it takes longer to build up equity.

When it comes down to it, whether you should go with a 15-year mortgage or a 30-year mortgage depends on your financial means as well as your ultimate goal. Do you want to pay off your loan quicker and can afford to pay several hundred dollars more each month? Then, the 15-year mortgage is ideal. But, if you need a lower payment spread out over a longer period of time (at least for now), choose the 30-year mortgage option. Always discuss this with your mortgage provider. They can answer any questions you may have.

Muna Dionne, your Inland Empire specialist with Coldwell Banker Realty